Three essays on banking issues

The three essays included in this dissertation are based upon the analysis of the Chilean banking system. Chile provides a very interesting case of study due to its high regulatory and supervisory standards, comparable to those of industrialized countries, as well as the strength and the stability of its banking system, that has been there for more than decade. Moreover, the prudential mechanisms introduced during the mid-eighties and onwards have been accompanied by information requirements, which have resulted in very good quality and quantity of data. Given all these characteristics, focusing in the particular case of Chile does not restrict the conclusions of this thesis to be empirically relevant from a broader perspective. For example, Chapter 2 deals with the issue of cost efficiency, showing that there has been an increase in the level of efficiency of individual banks by the late nineties. Such improvements have not been restricted to a particular group of banks, but to the overall banking system. However, major banks exhibit a significant and persistent better performance than their piers smaller sized counterparts. The fact that it is not possible to explain the differences in profitability in terms of differences in efficiency leaves an open puzzle. Chapter 3 carefully examines a panel data on interest margins and interest rate spreads in Chile over the period 1994-2001. The main finding is that regressions of spreads using interest rate data differ from those using interest margins, an important thing to keep in mind when interpreting the results of the large empirical literature that approximates the cost of financial intermediation through interest margins. Chapter 4 provides a thorough re-examination of the hypothesis of market discipline in depositor's behavior, raising serious doubts about the strength and robustness of the evidence in favor of market discipline in depositor's behavior previously found for some Latin American countries. In terms of future research, a more comprehensive model of the market structure as well as of the demand for different type of bank products based upon the new applied industrial organization literature could help to answer many of the unresolved questions.